Syncora’s Alternative Universe: What if bondholders had been prioritized like pensioners?

Syncora’s Alternative Universe: What if bondholders had been prioritized like pensioners?

August 26, 2014

Syncora’s Alternative Universe: What if bondholders had been prioritized like pensioners?

It was Syncora’s “Alternative Universe” argument.

An attorney for the bond insurer asked Judge Steven Rhodes to consider the Detroit bankruptcy case from the perspective of the financial creditor in a creative nine-minute narrative on Monday that was part of a bigger hearing.

Part Mad Libs, part legal strategy, part emotional appeal, Syncora attorney Stephen Hackney essentially replaced “pensioners” with “bondholders” as he attempted to demonstrate how some of the dynamics of the historic bankruptcy case would have played out if the parties who would benefit from some of the settlements were changed.

What I was thinking about your Honor, is the problem when you are a hated minority is that there can be bias that creeps into the system, and as I was preparing for this argument I was thinking about John Rawls and what he said about the “veil of ignorance” and how you can use the “veil of ignorance” to try and assist yourself as a policymaker to make sure that you don’t know who is who when you come to any particular circumstance and you make the decision about the fairness or rightness of something blind to who you are in the scenario and I was thinking how can I convey to Judge Rhodes, how can I put the “veil of ignorance” on him to decide this motion as if it weren’t once again hated Syncora, the obstructionist, Mr. Cullen (an attorney for the city who used this phrasing in an earlier argument) says we have a gun to the city’s head. How can I help him do that? So what I would like to do and I will not take forever to do this but I would ask you to hear me briefly on this, which is consider the following alternative universe which is:

The city of Detroit files for bankruptcy and a mediation team is appointed and while one of the members of the mediation team, his wife does sit on the board of the DIA or did, she’s a director emerita, the chief mediator tells everyone that that individual will be mediating issues relating to the invalidity of the COPs and everyone goes on from there.

Now Ms. Neville and Mr. Gordon who are fierce advocates on behalf of the retirees who I’ve gotten to know through this case and have done a great job for their clients, they are certainly concerned about what is going on in connection with this, but they are, you know, representing their own clients and trying to do the best that they can do for them. So they move on.

What happens next, your Honor, is you begin to hear some rumblings about the fact that there is some deal out there involving the art that will ultimately bring money into the city, and you aren’t sure about what exactly, how this is coming about. You aren’t sure exactly what he structure of it is and you won’t be for months and months and months, but you hear people saying things like “It’s important for it to protect the city’s credit rating which is the lifeblood of the city.” And as matters proceed very quickly from rumblings in mid December to in mid January an announcement that there will be contributions by foundations that are designed to protect the credit rating of the city which is the lifeblood of the city.

And there is an announcement that the monies will go solely to the city’s bondholders. They will not go at all to the retirees, and there are statements by people to the effect of “the retirees, those legacy costs, they were 80 percent of the problem that put this city into bankruptcy. They caused it. The unions broke this city. We shouldn’t punish the financial creditors for the fact that they got caught up in a fight between Detroit and its own unions. It’s not their fault. We have to protect the credit rating of the city. We need to get money for this art. This is a great thing.”

Now, the retirees’ lawyers who are fierce advocates are absolutely appalled by what they are seeing. They’re also confused. They don’t know how the transaction came about. They don’t know who decided that the money would all go to one particular creditor and not to another, and they are very concerned. So what they want to do is they want to set out and take discovery and find out what happened on this. But there’s a bigger problem. And the bigger problem is that the city and the mediators, whoever it was that decided to make that public announcement that the grand bargain funds would come in and that they would all go solely to the bondholders, they made the announcement before they actually got the bondholders to say that that would be sufficient. No indenture trustee. No monoline insurer actually came in and said, “yeah, if you give us everything that relates to the art, we’ll take that and we’ll be done.”

They never say that so what happens is as the mediation team and the city front run this by announcing this, they hand the keys of the bankruptcy over to the bondholders, and the bondholders now realize the city is on record saying two things: “I am absolutely essential to the future of the city, and the charitable foundations are insisting not only that I get all of the money but also that I approve the plan.”

With all this in hand, now that they do have profound recoveries in the case by any standard, now the bondholders come in and approve the deal.

Now, Ms. Neville wants to pick up her pen and write an objection but she can’t because she has an aneurysm and is taken to the hospital because she is absolutely infuriated about what’s happened here. So what she does, she doesn’t know how this has come together. She’s seen it all play out in front of her, and it doesn’t feel right to her. She begins to try and take discovery. She is stopped at every stage in the process.

She tries to find out what happened on the charitable foundation side. She can’t. She tries to find out from Kevyn Orr, “what happened with what you were thinking?” And he very solemnly tells her, “even though there have been many published statements in the press about this particular deal, oh, I’m sorry. Now I can’t say anything with respect to that.”

Now at the same time that she’s getting blocked at every turn, trying to develop this evidence, she is watching something else unfold in public, which is the chief mediator is lobbying the legislature to pass the needed legislation to get the deal. He’s holding press conferences, and in the press conferences he’s saying things like, “We need to remember that this Grand Bargain, what it’s really about and what it’s really about is Detroit’s financial creditors, The bondholders who have built our hospitals and our sewer system and kept our city running for so long. That’s what this is really about.”

And he turns to a group of people at the DIA and he says “And I’d like to recognize one of the heroes of this bankruptcy and that hero is Claude LeBlanc. He’s the chief restructuring officer of Syncora, and I want us all to stand up and applaud Claude LeBlanc as one of the heroes of the bankruptcy.” And he also quotes FGIC’s CEO but I don’t know who that is so I can’t put it in.

Ms. Neville’s also about to learn something else. She’s about to learn in a video from one of the foundations that very early on, the mediator who all agreed, the chief mediator, is described as a powerful man in the city, and he is a powerful man in the city, that this powerful man came to him and said, “there are two issues that are going to tie this bankruptcy up. No. 1 is the art, and No. 2 is the city’s credit rating. This city can’t function without a credit rating. If we try to invalidate those COPs, if we try and say General Obligation Bonds aren’t secure, it’s going to go all the way to the Supreme Court and so will the art. And so we’ve got to take care of that and what I’d like you to do is can you put together some of your friends and come in and make a contributions, solely, we’ll make sure it goes solely to the bondholders.We won’t let those retirees get any of this. Absolutely not. We know they’re part of the problem. They were crazy to have allowed themselves to continue to work for the city with deferred compensation. They live here. They know the politicians. Their unions are the ones that run things around here. They’re getting what they deserve. But you bondholders. We’re going to do it like Central Falls. We’re not going to let you get caught in the middle of this.”

That’s what Ms. Neville says. Now, I would like to ask you something, your Honor. Take the “veil of ignorance” that John Rawls talked about for a moment and ask yourself, in that parallel universe, do you seriously think you are engaging a motion to strike Ms. Neville’s supplemental objection that she files where she says that it ain’t right and it’s not consistent with good faith and that she didn’t know what was going on and that this is the best she’s been able to piece together from the outside? Let’s have a trial on the merits of this case, your Honor.

Let’s not be striking things off and cutting them off before we have an opportunity to at least be heard. That is all we are asking.

But isn’t it a contradiction to suppose a veil of ignorance, then to assign blame or casual relationships to the city and either of the parties, i,e. the pensioners or the creditors/bond holders being whatever percent responsible for putting the city in the position it is in? Isn’t it still just more simply that Syncora probably should not have insured what they insured? It also seems irrelevant what donations were made to the Grand Bargain, because, well, they were donations, made by private groups (and, if it’s not too presumptuous to say, it seems telling that no one is running in to donate to the creditors.) More generally, Rawls’s veil of ignorance just seems sort of inapplicable here. Am I off base?

http://freeourfreemarkets.org/ Steve Banicki

“The museum is owned by the city, and the city is, in fact, in bankruptcy. That asset lawfully should be available to assist in the plan of exit,” said Ian Peck, Art Capital’s chief executive. “But we also believe that this art is a national treasure and should be preserved as such.”

“As Detroit prepares to defend its plan next week to exit bankruptcy, city leaders have received an unusual offer: Why not mortgage all the Van Goghs, Picassos and other works in the Detroit Institute of Arts? A company called Art Capital, which makes loans backed by artwork, has told the city it is willing to lend it up to $3 billion, roughly 10 times the exit financing Detroit is now contemplating, using the museum’s art as collateral.” Detroit Mum on Proposal to Use Its Art as Collateral, New York Times, August 26, 2014

With this deal Detoit could leave the agreement in place with the city retirees and provide funds to make Detroit Public Schools the best district in the state. Why wouldn’t they want to do it?

In the same New York Times article Bill Nowling said. “The city supports and is committed to the grand bargain,” The city should be committed to the best deal possible and it appears the Grand Bargain may not be so Grand.

David Skeel, who teaches bankruptcy law at the University of Pennsylvania, said “Remember, there’s a great impetus, as you get to the end of a Chapter 9 bankruptcy, to confirm the plan,” he said. “But more important than confirming the plan is doing the right thing.”

The right thing to do is sell the art, improve Detroit’s schools and save Detroit’s future in the process…. http://lstrn.us/1op0jNq

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